AirBoss of America Corp

TSX:BOS

Earnings Call Analysis

AirBoss Strategies Amid Mixed 2023 Results

AirBoss, a company facing a challenging 2023, saw a notable turnaround in cash generation, swinging from a consumption of $30 million in 2022 to generation of $40 million in 2023. Despite the positive cash flow, the company experienced difficulties across its segments due to a U.S. UAW strike, inventory reductions, and a higher interest rate environment. AirBoss underwent a strategic transition, restructuring into two segments: AirBoss Rubber Solutions (ARS) and AirBoss Manufactured Products (AMP), to focus on core businesses and ensure more predictable revenue. Q4 sales decreased by 21.1%, with adjusted EBITDA dropping to $4 million compared to $13.9 million in the previous year's quarter. The company also improved its financial position, reducing net debt by $21.9 million and maintaining a net leverage ratio of 3.3x trailing 12-month adjusted EBITDA.

Substantial Shift in Cash Generation

The AirBoss of America's fourth quarter of 2023 marked a significant turnaround in cash generation, posting a positive $40 million against the previous year's $30 million cash consumption. This remarkable pivot reflects the company's ability to navigate a challenging economic landscape and represents a crucial step towards financial resilience.

Overcoming Economic Adversities

Despite the uptick in cash generation, AirBoss faced a multitude of challenges in 2023, from labor strikes to shifting customer inventory practices and a climate of rising interest rates. These factors influenced each business segment distinctly, prompting the company to embark on an extensive strategic review to manage costs and establish multilayer risk mitigation plans.

Reorganizing for Focus and Growth

As a result of its strategic review, AirBoss announced a restructuring of its reportable segments into two primary divisions: AirBoss Rubber Solutions (ARS) and AirBoss Manufactured Products (AMP). This reorganization is designed to consolidate rubber compounding operations and increase the focus on finished products for diverse markets, marking a strategic pivot to harness core strengths and streamline the company's resource allocation.

Navigating Persistent Market Uncertainty

The end of 2023 experienced persisting softness across ARS and AMP segments, which could continue into 2024 amid broader inflationary pressures and global geopolitical uncertainties. AirBoss is thus cautious about the immediate outlook while remaining committed to delivering through specialized products and operational efficiencies.

Long-Term Vision Amidst Contemporary Challenges

AirBoss's long-term strategy centers on growing the core Rubber Solutions segment through innovation and expanding market share— including organic and inorganic routes—alongside diversifying its product portfolio. For Manufactured Products, the focus is on expanding non-automotive rubber-molded products and refining the product line to align with the company's core competencies.

Financial Highlights and Reactions to Softening Sales

Q4 witnessed a steep 21.1% decline in consolidated net sales, gross profit margins shrunk dramatically due to difficulties faced particularly in the manufactured products and defense product lines. Adjusted EBITDA also took a hit, reflecting these unfavorable trends and underscoring the economic challenges that the company grappled with throughout the year.

Improvements in Free Cash Flow and Operational Performance

Despite the decline in sales and gross profit, AirBoss saw an increase in free cash flow for Q4 2023, achieving $6.1 million compared to negative $4.7 million the previous year. This increase, alongside advancements in operational cost improvements, highlights the company's efforts to maintain financial stability and shows potential for recovery moving forward.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the AirBoss of America Fourth Quarter Conference Call. [Operator Instructions].

I would now like to turn the conference over to Gren Schoch, Chairman and Co-Chief Executive Officer. Please go ahead.

[Peter Schoch, executive]

Thank you, operator. Good morning, everybody, and thank you for joining us for the AirBoss Fourth Quarter 2023 Results Conference Call. My name is Gren Schoch. I'm the Chairman and co-CEO of AirBoss. With me today are Chris Bitsakakis, our President and Co-CEO; Frank Ientile, our CFO; and Chris Figel, our EVP and General Counsel.

Our agenda today will start with a review of the operational highlights for the quarter and year, followed by a discussion of our financial results before we open the conference line to questions.

Before we begin, I will remind listeners that our remarks today contain forward-looking statements, including our estimates of future developments. We invite listeners to review risk factors related to our business in our annual information form and our MD&A, both of which are available on SEDAR and on our corporate website.

Also, we will discuss certain non-GAAP measures, including EBITDA. Reconciliations of these measures are available in our MD&A.

Finally, please note that our reporting currency is in U.S. dollars. References today will be in U.S. dollars, unless we indicate otherwise.

With that, I'll now turn it over to Chris Bitsakakis for our operational review.

[Chris Bitsakakis, executive]

Thank you, Gren, and good morning, everyone. As we look at our Q4 and year ended December 2023 results, we are pleased with the significant positive swing in our cash generation from a consumption of $30 million in 2022 to cash generation of $40 million in 2023. Despite the improvement in cash generation, 2023 was a challenging year for AirBoss as economic headwinds impacted each segment to varying degrees. Between the UAW strike, the in-sourcing of tolling business, customers reducing inventory at the end of the year and the general higher interest rate climate affecting demand, there was no shortage of tactical challenges.

In light of those challenges, the company focused on managing costs and developing multilayer risk mitigation plans while undertaking an extensive in-depth strategic review of each of our business units. This detailed review has resulted in a new strategic transition for the corporation, which includes a shift in reportable segments commencing with our results for the fourth quarter and year ended December 31, 2023.

AirBoss will now report results under 2 segments: AirBoss Rubber Solutions and AirBoss Manufactured Products. All rubber compounding operations are now consolidated in the new ARS segment, including the rubber compounding operations in Acton Vale, Quebec, which emphasizes this segment's ability to act as the core driver for sustainable and predictable growth and productivity for the corporation. The new manufactured products segment consists of all operations which manufacture or distribute finished products to a variety of targeted markets, including automotive, non-automotive and defense.

As A&P will now encompass all manufactured and distributed finished goods, we will be undertaking an additional product line by product line strategic review in order to assess their overall alignment with the strategic direction of the corporation. Through this transition, we will be making a concerted effort to refocus the company's resources on the core business of AirBoss. By narrowing our focus, we expect to be able to deliver a more consistent and predictable revenue stream going forward.

In terms of last year, both ARS and AMP experienced residual softness in Q4 2023. While the eventual recovery in volumes in 2024 for each segment will remain subject to the ongoing challenges related to continued inflation pressures and the ongoing global geopolitical challenges and successful conversion of key opportunities. For ARS, the segment experienced some retraction in most business lines compared to 2022, which was a record year from both a sales and EBITDA perspective. However, 2023 was still a solid year from a sales and EBITDA perspective.

Despite robust performance earlier in the year, there was a pronounced softness experienced at the end of Q4 2023 as sales were impacted by customers focused on reducing inventory levels going into their year-end. Despite these headwinds, the segment remains focused on executing on its strategy to deliver strong results with specialized products, expanded production of a broader array of compounds and enhanced flexibility in attracting and fulfilling new business through identified synergies and margin expansion.

AMP experienced strong traction in its rubber molded product lines despite challenges towards the latter part of the year, due to labor disruptions related to the UAW strike. The defense business experienced softness across the product portfolio throughout the entire year due to ongoing delays in the sourcing of major program awards. Throughout the year, management continued its focus on operational improvements, including managing costs and a commitment to drive efficiencies and best-in-class automation. We expect the resegmentation to offer additional opportunities for cost and efficiency improvements.

Based on our new strategic direction, the company's long-term priorities consist of the following: firstly, to grow the core Rubber Solutions segment by emphasizing rubber compounding as the core driver for sustainable growth and productivity, focusing on innovation in custom rubber compounding while aiming to expand market share through organic and inorganic means while striving to achieve enhanced diversification by a broadening of the product breadth through technological advancements and investments in specialty compound niches.

Secondly, focusing manufactured products growth strategy on diversifying and expanding its range of nonautomotive rubber molded products, while simultaneously narrowing the overall product line range through a renewed focus on the core competencies; and thirdly, while undertaking a strategic review of all product lines currently manufactured and sold by the company in its manufactured products segment, we plan to target inorganic growth opportunities with a focus on adding new compounds and products, technical capabilities and geographic regions of selected North American and international markets.

In summary, AirBoss will continue to focus on these long-term priorities while investing in core areas of the business to establish a solid foundation that will support long-term predictable and sustainable growth.

With that, I will now pass the call over to Frank for the financial review.

[Frank Ientile, executive]

Thanks, Chris, and good morning, everyone. As a reminder, all dollar amounts presented today are in U.S. dollars, except for dividends per share, which are in Canadian dollars. Percentage changes compared Q4 of 2023 to Q4 of 2022 unless otherwise noted.

Starting from the top line. Consolidated net sales for Q4 of 2023 decreased by 21.1% and $92.7 million from $117.5 million in Q4 of 2022 with decreases at both Rubber Solutions and Manufactured Products. Consolidated gross profit for Q4 of 2023 decreased to $5.1 million or 5.5% of net sales from $24.8 million or 21.1% of net sales in Q4 of 2022 due to decreases in manufactured products, defense product lines and rubber molded products line.

Our adjusted EBITDA decreased to $4 million for Q4 of 2023 compared to $13.9 million for Q4 of 2022. Adjusted profit for Q4 of '23 was negative $2.8 million or negative $0.10 per diluted adjusted earnings per share compared to $12.3 million or $0.45 per diluted adjusted earnings per share for Q4 of 2022.

Turning now to our individual segments. Net sales for Q4 2023 in the Rubber Solutions segment decreased by 21.1% to $54.5 million from $69 million in Q4 of 2022. The decrease in net sales for Q4 of '23 was primarily due to the softness across most sectors. Gross profit at Rubber Solutions for Q4 of '23 was $7.8 million or 14.4% of net sales compared with $7.7 million or 11.2% of net sales in Q4 of 2022. The increase in gross profit margin was principally due to product mix, managing overhead costs, partially offset by a reduction in volume.

At Manufactured Products, net sales for Q4 of 2023 decreased by 19.9% to $44 million compared with $55 million in Q4 of 2022. The decrease was a result of lower volume in the defense products and the rubber molded products lines. Gross profit at Manufactured Products for Q4 of 2023 was negative $2.8 million compared with $17.1 million in Q4 of 2022. The decrease was primarily a result of an $8 million noncash rate down related to nitrile gloves inventory and retroactive pricing from improved arrangements with key suppliers and customers and lower volumes in the defense products line recognized comparable to the prior year in addition to lower volume in the defense products and rubber molded product line. This was partially offset by operational cost improvements in the segment.

Free cash flow for Q4 of '23 was $6.1 million compared to negative $4.7 million at the end of Q4 2022. This positive cash inflow supported our continued investment in capital assets and further reductions of our debt. CapEx was $3.2 million for Q4 of 2023. By the end of...

[Technical Difficulty]

[Operator]

Pardon the interruption, this is the operator. The speakers have disconnected. Please standby as we get them reconnected.

Pardon me, this is the operator. Please standby, while we reconnect the speakers. The speakers are now connected.

[Frank Ientile, executive]

Apologies, this is Frank Ientile. It looks like we got disconnected. I will just wrap up.

Free cash flow for Q4 of 2023 was $6.1 million compared to negative $4.7 million at the end of Q4 2022. This positive cash inflow supported our continued investment in capital assets and further reductions of our debt. CapEx was $3.2 million for Q4 of 2023.

By the end of Q4 of 2023, we reduced our net debt balance by $21.9 million compared to Q4 of 2022. We expect to fund the company's 2024 operating cash requirements, including required working capital investments, capital expenditures and scheduled debt repayments from cash on hand, cash flow from operations and committed borrowing capacity.

Our revolving credit facility availability is $250 million with an accordion of $75 million and approximately $119.1 million was drawn at the end of Q4 of 2023. As of the end of the quarter, we had net debt of $88.2 million for a net leverage ratio of 3.3x trailing 12-month adjusted EBITDA. With that, I will now turn the call over to Chris.

[Chris Bitsakakis, executive]

Thank you, Frank. Operator, at this point, we can open the line for Q&A. And again, our apologies for the technical difficulties. Hopefully, we don't get disconnected again. But if we do, please be patient, and we'll reconnect.

Operator, feel free to queue up the questions for us.

[Operator]

[Operator Instructions] Our first question comes from Ahmed Abdullah of National Bank of Canada.

[Ahmed Abdullah, analyst]

Touching on the volume softness you've mentioned that you've been seeing at ARS. Do you have visibility that would give you confidence to say that we're turning a corner here? And also, can you perhaps elaborate if this softness is more pronounced at certain customer sectors versus others? Or is this more related to macroeconomic factors affecting everybody?

[Chris Bitsakakis, executive]

Yes. Thanks for the question, Ahmed. That's -- it's a very good question. What we saw towards the end of Q4 was a very generalized pullback of orders for ARS. Much of them with the intention of our customers interested in reducing their inventory levels going into the end of their fiscal years. And so we saw a significant pullback in orders.

We saw that softness continue on for the first part of January, but it appears that we're starting to turn the corner and the February orders were quite a bit stronger than January and March has continued down that path. So we think it was sort of a broader economic slowdown with the interest in not having tons of inventory over their shutdowns. But it appears that things are sort of getting back to normal now as we speak.

[Ahmed Abdullah, analyst]

Okay. And as you come out of in depth strategic review with the new long-term priorities that you've been communicating, I just wonder what is different now versus before that would get you closer to achieving these priorities and targets? Or are there more structural changes that you need to be undergoing to get you closer to these goals? And maybe you could can perhaps elaborate on these changes needed?

[Chris Bitsakakis, executive]

Yes, certainly. I mean there will be more changes coming. But to sort of give an overview, a 33,000-foot view of what this looks like, it really is a narrowing of our focus back to our core competencies and looking at every aspect of our business that supports that core competency and every aspect that doesn't. And although that transition doesn't happen overnight. It will certainly be over the next period of time, you will see certain things kind of support that overall transition.

We feel that narrowing down our focus back into our core competencies, focusing on segments that we have a very strong market share in where our core competencies are and where we see the most amount of growth available, those are the sections that we're going to be focusing more attention on. And yes, you will see as events happen around that solidification of our core competency. And you'll see everything sort of align here over the next little while.

[Operator]

Our next question comes from Kevin Chiang of CIBC.

[Kevin Chiang, analyst]

Maybe just when you think of 2024, and I appreciate all the moving parts here, just on a level set, what do you think a good run rate for revenue and EBITDA for this business is? Is it what we saw in Q4? It sounds like maybe there's a little bit of positive momentum as you enter 2024 here. So maybe that ends up being the trough. But is there a way to kind of level set what maybe the base business can give you and then you can be on top, broader economic growth and upside from some of the restructuring you're doing on top of the space business?

[Frank Ientile, executive]

Yes, Kevin, I'll start the answer to that question. I think Q4 was additionally soft, and I think we have to look more like between Q2 and Q3 to sort of get a level set run rate moving forward. And obviously, as we've indicated, there was some pronounced softness in -- across the segments in Q4, but we anticipate things moving back to sort of a more normalized run rate as we experienced earlier in the year from that perspective. And then, Chris, I don't know if there's anything else from the volume perspective just based on what we're seeing.

[Chris Bitsakakis, executive]

Yes. Sorry, Kevin. I didn't catch all of your question because you were cutting out a little bit. So -- is there any extra color that I can add to that?

[Kevin Chiang, analyst]

No. I think Frank answered that perfectly. So that's helpful. But maybe just on volumes. If I look at, I guess, non-tolling volumes, I think they've been down roughly 9% both in Q3 and Q4. Tolling looks like you had a bit of a big hit in Q4, but it sounds like that might be related to some of the inventory comments you made. Just I guess as you look at these volume trends, is the feeling now that this is the trough and you can sequentially build off of this in 2024? Or is it still pretty uncertain when you have your conversations with your key customers?

[Chris Bitsakakis, executive]

No, that's our feeling that we have 23 new customers that we're bringing on board at ARS here starting early in the year. So we expect to be able to grow the non-tolling business throughout the year. Of course, we have to still execute because when you're growing new customers, your quality, delivery, all the blocking and tackling has to work out just right. But we have a very strong growth plan on our non-tolling revenue. We'll continue to drive that up on the non-tolling side.

On the tolling side, it's kind of interesting. It comes and goes based on the general economy. So as the economy generally improves, then our tolling customers start to run out of their own capacity and start to outsource more. But in general, we're looking at driving our business more towards non-tolling because it's much more predictable, right?

Of course, we always have capacity available to jump in when a key tolling customer has a need. But we want to make sure that we're not so reliant on it going forward, because it comes in waves and it leaves in waves, which enhances our -- the lack of predictability on that part of the segment. So we want to make sure that we get enough of a core base business that is non-tolling that when the tolling comes in is good, it's extra. But when it goes away, it doesn't impact as much as it did last year.

[Kevin Chiang, analyst]

That's helpful. And then just last 1, you've used the word predictable a few times now on this call. Just I guess as you think about the broader pipeline of opportunities you have and maybe some of the stuff you've obviously very successful in winning during the pandemic. Does that have you rethinking how you bid on some of that stuff? Is a big HHS contract, something you'd want to go after in the future, knowing that you get this 1 year earnings bump, but obviously, it can create a lot of volatility and it is less predictable on a go-forward basis. Just how do you think about bidding on that stuff moving forward relative to the strategy to create a more predictable earnings stream?

[Chris Bitsakakis, executive]

It's a really important priority for us. The predictability. And yes, I mean, just speaking about -- you mentioned HHS, we had that huge increase during the pandemic and lots of promises from the government that they never wanted to be caught again in the next event, whether it be a pandemic or something else with a lack of domestic PPE available. But I think I mentioned a couple of times in our presentation that we are going to be doing a product line by product line review. It won't necessarily change the way that we quote the way you phrased that question, but it will -- it could change the product lines that we decide to quote on. And because although there is huge potential for massive awards on and you mentioned HHS. At the same time, it requires a lot of resources, and it really contributes to the lack of predictability.

So I'm not going to preempt what that product line by product line review is going to yield for us. We're doing a very scientific sort of view as to the product lines we want to continue to be in and the ones we don't want to be in. And certainly, predictability is 1 of the key factors that we're looking at as we make those decisions.

[Operator]

Our next question comes from David Ocampo of Cormark Securities.

[David Ocampo, analyst]

Just following up on Kevin's line of questioning there. I'm just curious, which products within defense you guys view as core and which ones you view as non-core? And if you do take a step back from there? Would it be a divestiture or just closing down the product line?

[Chris Bitsakakis, executive]

We actually haven't made a decision of what we view as core and what we view as non-core. We've kind of set up the criteria that we're looking at in terms of core versus non-core. And of course, you can imagine the kinds of things that we're looking at, the margins that we can expect, the size of the growth that we could predict. The vertical integration into the rubber business is that existent or nonexistent.

So those are the kinds of things that we're looking at product line by product line, but we created the overall strategy to focus more on the core business and that was approved by the Board in December. So now we're going forward with the more in-depth review of product line by product line. And certainly, a lot of those defense products, we're going to have to take a close look at because they require a lot of resources. And we want to make sure that we apply our resources in the correct way for the greatest opportunity for growth for the business. And we can't answer that question today. And as I said earlier to Kevin, I don't want to preempt the results of those product line by product line reviews. But certainly, as we go through that, there is opportunity for divestiture. There's opportunity for mergers, there is opportunities for acquisitions and spin-offs. I mean you could put any list of things there that are available to us as we decide if something ends up in the non-core bucket.

[David Ocampo, analyst]

Got you. And I think, Chris, previously, you talked about restructuring the Defense Group. And I think you even went as far as putting a cost saving number to that, I think it was $7 million or $8 million annualized. Is that still a reasonable target for 2024?

[Chris Bitsakakis, executive]

Yes. So we did a restructuring, not only in the Defense Group but in...

[Technical Difficulty]

[Operator]

Pardon me, this is the operator. Please standby, while we reconnect the speakers.

Pardon me, we have the speakers back on the call.

[Chris Bitsakakis, executive]

Sorry about that. David, something went down mid answer. But what I was getting at is we did make some changes and some reductions in 2023, and those are carrying forward into 2024. However, with the resegmentation, and with the deep dive strategic review on product line by product line, we expect there to be more opportunities for synergy savings going forward.

[David Ocampo, analyst]

Okay. That's helpful. And then maybe for Frank, I was surprised to still see an $8 million write-down of the nitrile gloves. Is that largely behind us now and we can't expect any more write-downs and maybe even potential for releasing that inventory down the road?

[Frank Ientile, executive]

Yes. David, look, with the oversupply that occurred during the pandemic, there's been obviously a lot of pressure -- downward pressure on the gloves. And while there still is some to move, we've taken the necessary steps from a net realizable value perspective to adjust accordingly. And we feel that we're where we need to be to move this last little bit. But again, it's really spillover from the past, and everybody's priority is obviously focused on deleveraging and converting working capital as we've been doing across all the elements.

[David Ocampo, analyst]

Okay. And then if I could just sneak 1 last 1 in here, just quickly. Just on the real estate monetization. How much capital do you think that can unlock -- and would you look to redeploy that on inorganic or organic growth opportunities?

[Chris Bitsakakis, executive]

Yes. Generally speaking, we expect the monetization of the real estate to offer funds for us to use to expand the business whether it be through acquisitions or even debt repayment or whatever, we decide. But certainly, it's going to be a fairly significant process for us. We have not kicked that off quite yet. But once we decide to kick it off, we'll be able to give a few more details around that.

Right now, it's a fairly high interest rate environment. So we're taking our time in terms of getting ready to do that. But once we're able to monetize that, it will be a significant injection of cash for us to use to help grow the business, particularly on the rubber compounding side. It will facilitate the building of a brand-new state-of-the-art facility that will improve efficiencies and at the same time, inject capital for us to use to grow the business. So as more details become available for that, David, we'll be able to share a little bit more around that.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Chris Bitsakakis for any closing remarks.

[Chris Bitsakakis, executive]

Thank you, operator, and thank you, everyone, for attending today's call. Our sincerest apologies over the technical difficulties we were having, but please reach out to us directly or through our Investor Relations team if you have any further questions on our results or in general. Thank you very much, and have a great day.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.